. Explosively growing super funds bid up the price of Australian shares,

. And when post-GFC capital honed in on Australian houses.

Tim Colebatch reports today on the beginnings of action to address the problem:

FEDERAL and state governments have commissioned a working party of officials to hold a no-stone-unturned inquiry into all factors contributing to record house prices, as Labor senses the issue is becoming a political danger.

The inquiry, to deliver its first report within weeks, will examine sensitive areas such as tax breaks for negative gearing, land banking by developers, and whether grants to first home buyers push up house prices. Sources said the working party, comprising federal and state Treasury officials, had been operating for several months, looking at the factors adding to housing demand, and those inhibiting supply. Almost all key factors are on its agenda.

The two exceptions are the record levels of migration and rising real estate investment by foreigners and temporary residents.

Assistant Treasurer Nick Sherry today will hold a telephone conference with real estate agents over reports that up to 30 per cent of homes sold in Melbourne's inner-eastern suburbs are being bought by Asian buyers. The 13-point agenda for the working party starts from the one thing all agree on: that high house prices are the result of too many buyers chasing too few properties.

Now here's Mitchell...

House prices are rising strongly even though new lending for housing is falling, and cashed-up foreign investors are prime suspects. The government should put foreign investment in residential real estate under closer regulation of the Foreign Investment Review Board, and the sooner the better.

Foreign investment and housing affordability are a politically explosive combination, and a godsend in an election year for politicians who don't mind engaging in a little outer-suburban racism.

The government will end up increasing the role of the FIRB anyway. If it moves quickly it can avoid an ugly debate.

Australia is now one of the world's few prosperous developed economies, which makes it a magnet for foreign investors and migrants.

The property market, where the supply of new housing is constrained by the states' poor urban planning, is a natural hot spot.

Unfortunately, we are a long way from the reform of urban planning that would make a serious supply-side difference to the price of housing in Australia's major cities. The problem must therefore be managed from the demand side.

Closer involvement by the FIRB would reassure the public that the activities of foreign investors were under proper supervision.

House prices and the highly charged atmosphere of the property market are Australia's biggest economic problem.

The greatest fear is that the surge in property prices will give birth to a speculative bubble in which prices become detached from underlying market fundamentals. But even without going to that extreme, the strength of property prices is complicating the task of cooling the housing market.

The Reserve Bank's action has seen mortgage rates restored to about their long-term average level, and this has reduced the local demand for housing loans. But Australia's monetary policy has less effect on the behaviour of foreign investors who borrow from their own banks at much lower interest rates.

Higher Australian interest rates do strengthen the exchange rate, which makes Australian property more expensive for foreigners. But that does not necessarily put them off. With interest rates expected to rise further in the coming year, foreign investors are just as likely to decide to jump into the Australian market before the dollar becomes even stronger.

Under the current FIRB rules, purchases of new residential properties are "normally approved" and there is no limit on the number that can be sold to foreigners. There is, however, a ban on purchasing second-hand dwellings for investment purposes.

Purchasers must have temporary visas, although they are no longer required to dispose of the property on leaving the country. And homes purchased for overseas students are no longer subject to a cap of $300,000.

In the current economic environment there is probably a case for imposing discretionary global limits on residential investment. For that, the FIRB could draw on the expertise of the Treasury, which is acutely aware of the need to keep the property market on track.

The involvement of foreign investors slightly changes the nature of the property price problem.

Property price booms do their greatest damage when they collapse, ruining highly geared investors and, sometimes, financial institutions in the process. Ruination of foreigners and their financial institutions does not pose the same threat to the Australian economy.

Apart from government regulation, the biggest cause of Australia's shortage of rental properties is the low rental yield.

Gross rental yields are now about 4.5 per cent in Sydney and 3.9 per cent in Melbourne. According to the experts, yields probably need to rise by another 2 per cent.

The best way to attract investment into the rental market is for rents to rise relative to prices.

This will happen, although the structure of the residential accommodation industry probably will make the adjustment a slow process.

A speculative boom in rental property also can boost the supply of rental accommodation in the short term, but is less reliable and potentially more disruptive.

For a start, it will send prices up across the housing market, making the purchase of homes less affordable for other Australian residents.

That is the immediate hot-button political issue.

Any subsequent decline of prices from unsustainable levels also affects Australian investors and home owners.